New "Saver" reverse mortgage offers lower borrowing costs
February 11, 2011
Although reverse mortgages--getting the bank to pay you when you're 62 or older for the equity you've built up in your home--have always sounded like a great idea, the high fees have often discouraged people from taking advantage of them. They figure it's cheaper to live off of their money market accounts or savings accounts.
The Wall Street Journal reported recently that this may be changing since the advent last year of the Federal Housing Administration's "Saver" reverse mortgage, which reduces some of the upfront fees by about 40 percent.
What is a reverse mortgage?
A reverse mortgage allows a homeowner to receive a lump sum, line of credit or monthly payments up to the value of the equity in their home. The mortgage isn't due until the client dies, moves, sells or defaults on property tax or insurance. Among the upfront charges, which can approach 5 percent of the home's total value, is a mortgage insurance premium of about 2 percent of the property's value.
But the Saver mortgage from the FHA, which insures most reverse mortgages, has cut that premium to 0.01 percent in return for allowing borrowers to take out only 80 to 90 percent of what they might have gotten from a traditional reverse mortgage. Banks and other lenders are also reducing many of the fees and the interest rates they charge on reverse mortgages.
How the reverse mortgage is used
Although most reverse mortgages are used to cover a retiree's long-term medical expenses, some borrowers are taking them out because they want to protect their other investments, which are performing better than the housing market. And the interest rates on reverse mortgages are cheaper in some cases than home equity credit lines.
Nevertheless, it may take a while before you can recover your upfront costs, so plan to stay in your home for a while until you've recouped those expenses.
If you're wondering if a reverse mortgage or a Saver mortgage is right for you, you should consult a reverse-mortgage counselor approved by the U.S. Department of Housing and Urban Development at 800-569-4287.
